Inherited individual retirement accounts represent a substantial financial windfall for many beneficiaries, with the average heir receiving an account valued at $128,000 when they are approximately 59 years old, according to analysis of nearly 83,000 accounts conducted in 2024, according to a Vanguard report.
Under regulations established since 2020, certain heirs, particularly adult children, must withdraw funds from inherited IRAs within a 10-year period following the original account owner’s death. For pretax accounts, this withdrawal timeline can significantly increase adjusted gross income, potentially elevating beneficiaries into higher tax brackets and limiting access to various tax deductions and credits. Some beneficiaries must also begin taking required minimum distributions annually during the 10-year window if the original account owner had reached retirement distribution age before death.
Financial planning experts recommend that heirs develop withdrawal strategies tailored to their individual circumstances. One approach involves projecting income across the full 10-year period and timing larger distributions during years when beneficiaries anticipate lower income levels, such as during retirement or planned sabbaticals. This strategy can help distribute the tax burden more evenly and potentially minimize overall tax liability.
Accountholders planning to leave IRAs to heirs should also consider the income levels of potential beneficiaries when designating account recipients. Directing larger IRA balances to heirs in lower tax brackets while allocating tax-advantaged assets to higher-earning beneficiaries can reduce overall family tax obligations. Additionally, original account owners may consider converting pretax IRA funds to Roth IRAs during their lifetime, a strategy that triggers immediate taxes but provides heirs with tax-free withdrawal options. Experts typically recommend timing such conversions during early retirement when income levels are lower.
These planning considerations take on heightened importance amid a projected significant intergenerational wealth transfer, with estimates suggesting total transfers between generations could reach $74 trillion over the coming 20 to 25 years, according to a 2025 UBS report.
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